The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Corporation's results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.

Cautionary Statement Concerning Forward-Looking Statements

See Item 1 of this Annual Report on Form 10-K for information regarding forward looking statements.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by the Corporation conform, in all material respects, to U.S. GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

The Corporation's accounting policies are fundamental to understanding this MD&A. The most significant accounting policies followed by the Corporation are presented in Note 1 of the Notes to Consolidated Financial Statements. The Corporation has identified its policies on the allowance for loan losses, income tax liabilities and goodwill and other identifiable intangible assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies can be found in Note 1 of the Notes to Consolidated Financial Statements.

Allowance for Loan Losses and Related Provision

The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the Corporation's Consolidated Statements of Condition.

The evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers' ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.

Other-Than-Temporary Impairment of Securities

Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and the duration of the decline and the intent and ability of the Corporation to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced to fair value and a corresponding charge to earnings is recognized. Impairment charges on certain investment securities of approximately $1.8 million were recognized during the year ended December 31, 2008, respectively. As a result of the bankruptcy of Lehman Brothers in September 2008, the Corporation incurred an impairment charge of $1.2 million in its investment securities portfolio during the third quarter of 2008 and an additional $100,000 during the fourth quarter of 2008. These charges were based on the Corporation's expectation at December 31, 2008 of what the Corporation believes it will receive from the Lehman bankruptcy proceedings as opposed to an attempted sale into an illiquid market. Additionally, the Corporation recorded impairment charges of $461,000 relating to three equity security holdings. This determination was made after certain events during 2008 relating to the financial condition of the issuers caused concern that recovery of the carrying value would not occur in the near term. As such, it was deemed appropriate to mark each applicable security down to fair value. No impairment charges were recognized during the year ended December 31, 2007.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Corporation's consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Corporation's consolidated financial condition or results of operations. Notes 1 and 11 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes.

Goodwill

The Corporation adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but tested for impairment annually, or more frequently if impairment indicators arise for impairment. No impairment charge was deemed necessary for the years ended December 31, 2008 and 2007.

Fair Value of Investment Securities

In October 2008, the FASB issued FSP SFAS No. 157-3, "Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active" ("FSP 157-3"), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 was effective immediately and applies to the Corporation's financial statements, effective September 30, 2008. The Corporation applied the guidance in FSP 157-3 when determining fair value for the Corporation's private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 18 of the Notes to Consolidated Financial Statements, Fair Value Measurements and Fair Value of Financial Instruments, for further discussion.

Introduction

The following introduction to Management's Discussion and Analysis highlights the principal factors that contributed to the Corporation's earnings performance in 2008.

The year of 2008 was a challenging one for the banking industry and for the Corporation. The current global financial crisis and difficult economic climate has created challenges to financial institutions both domestically and abroad. Interest rates for 2008 were reflective of significantly lower short-term interest rates in an effort to stimulate the economy. Competition for deposits in the Corporation's marketplace remained intense while customers' preference in seeking safety through full FDIC insured products and more liquidity became paramount in light of the financial crisis. Market conditions became more volatile during the second half of 2008, related to global instability in the markets in connection with the sub-prime crises. As a result, the Federal Reserve decreased short-term interest rates 400 basis points throughout the course of 2008. Short-term interest rates declined more than longer term rates resulting in a somewhat improved yield curve, which was an improvement from the flat yield curve experienced during 2006 and 2007. This resulted in an expansion of the Corporation's net interest margin, which is the Corporation's primary source of income. The Corporation also took action throughout the year to reduce further exposure to interest rates through a reduction in higher cost funding in the deposit mix and improvement in the earning-asset mix. The Corporation's continued progress in growing and improving its balance sheet earning asset mix has helped to expand its margin. We intend to continue to use a portion of the proceeds of maturing investments to help fund new loan growth.

The Corporation's net income in 2008 was $5.8 million or $0.45 per fully diluted common share, compared with net income of $3.9 million or $0.28 per fully diluted common share in 2007. A substantial portion of our earnings in 2008 was from core operations while earnings in 2007 arose principally from tax benefits.

Earnings for 2008 were impacted by interest margin expansion, higher service charge fees and income from bank owned life insurance coupled with a significant reduction in operating overhead. These improvements were partially offset by net securities losses as compared to net gains in 2007 along with a higher effective tax rate. Other expense for the twelve-months ended December 31, 2008 totaled $19.5 million, a decrease of $5.1 million, or 20.8%, from the comparable period in 2007.

Lower operating expenses during the twelve-month period resulted primarily from decreases in salaries and employee benefits, premise and equipment expense, professional and consulting and other expenses, offset in part by an increase in net occupancy expenses. Other non-interest expense decreased $1.0 million due primarily to the charge-off of the expenses associated with the Beacon Trust acquisition and its termination in 2007. The Corporation previously announced a number of strategic outsourcing agreements, to aid in the realization of its goal to reduce operating overhead and shrink the infrastructure of the Corporation. The cost reduction plans resulted in the reduction of workforce by 12 staff positions during the second quarter of 2008. Additionally, the Corporation completed its outsourcing with Atlantic Central Bankers Bank Banking and Infrastructure and Technology Services, Inc. and the migration of its telecommunications lines to their service platform. The result of all the announced strategic outsourcing initiatives is expected to result in annual cost savings of approximately $600,000. Additionally, the closing of the Corporation's Red Oak Banking Center and its branch on 84 South Street in Morristown during the fourth quarter of 2007 helped to reduce operating overhead during 2008. These facilities have been combined with the Morristown Town Hall office, which has resulted in improved efficiency and increased customer service.

For the twelve-months ended December 31, 2008, total salaries and benefits decreased by $2.9 million, or 25.6% to $8.5 million. The reduction in expense was attributable to a reduction in staff, pension plan curtailment and elimination of certain benefit plans.

The increased tax rate resulted in part from a change in 2007 in the Corporation's business entity structure, which led to a $1.4 million tax benefit taken that year.

Total non-interest revenue decreased as a percentage of total revenue in 2008 largely due to $1.1 million in net securities losses and impairment charges in 2008 as compared to net securities gains of $900,000 in 2007. For the twelve-months ended December 31, 2008, total other income decreased $1.7 million as compared with the twelve-months of 2007. Excluding net securities gains and losses in the respective periods, the Corporation recorded total other income of $3.8 million in the twelve-months ended December 31, 2008, compared to $3.5 million in the twelve-months ended December 31, 2007, representing an increase of $278,000 or 8.0 percent. This increase was primarily attributable to a $230,000 increase in tax-free proceeds in excess of contract value on the Corporation's BOLI due to the death of one insured participant. The Corporation recognized higher service charges, commissions and fees and higher earnings from the appreciation in the cash surrender value of the Corporation's BOLI investment, partially offset by a decline in commissions from sales of mutual funds and annuities.

Total assets at December 31, 2008 were $1.023 billion, an increase of 0.6 percent from assets of $1.018 billion at December 31, 2007. The increase in assets, in part, reflects the growth in our loan portfolio, partially offset by the continued reduction in the size of the Corporation's investment portfolio. Additionally, there has been a concerted effort to reduce higher costing retail deposits.

Loan growth remained strong in 2008, spurred by business development efforts. Overall, the portfolio grew year over year by approximately $81.2 million on average or a 15.0 percent increase from 2007. Strong demand for commercial real estate loans prevailed throughout the year in the Corporation's market in New Jersey, despite the economic climate at both the state and national levels and market turmoil from the sub-prime markets. The Corporation is encouraged by the strength of loan demand and positive momentum gained this past year in growing that segment of earning-assets.

Asset quality continues to remain high and credit culture conservative. At December 31, 2008, non-performing assets totaled $4.7 million or 0.46 percent of total assets, as compared with $4.4 million or 0.43 percent at December 31, 2007. A decrease in non-accrual loans from December 31, 2007 was primarily attributable to the repayment during the first quarter of 2008 of principal of $2.5 million and interest of $83,277 on one commercial mortgage. During the fourth quarter of 2008, other real estate owned (OREO) increased to $3.9 million due solely to the addition of a residential condominium construction project in Union County, New Jersey.

At December 31, 2008, the total allowance for loan losses amounted to approximately $6.3 million, or 0.92% of total loans. The allowance for loan losses as a percent of total non-performing loans amounted to 809.1 percent at December 31, 2008 as compared with 929.7 percent at September 30, 2008 and 132.1 percent at December 31, 2007. This increase in the ratio from December 31, 2007 to December 31, 2008 was due to the previously mentioned decrease in non-performing loans.

Deposit experience was mixed in 2008, reflective of the changes in short-term interest rates during 2008. A decline in average deposits included a strategic shift to reduce the Corporation's dependency on more rate sensitive high costing funds, which were subject to maturity and repricing, in favor of lower costing wholesale funds available. At December 31, 2008, total deposits for the Corporation were $659.5 million. Non-interest-bearing core deposits, a low-cost source of funding, continue to be a key-funding source. At December 31, 2008, this source of funding amounted to $113.3 million or 12.1 percent of total funding sources and 17.2 percent of total deposits.

Certificates of deposits $100,000 and greater increased to 15.2 percent of total deposits at December 31, 2008 from 9.2 percent one year earlier. With the current turmoil in the financial markets, some of the Corporation's depositors have become sensitive to obtaining full FDIC insurance for their time deposits. To accommodate its customers, the Corporation began offering Certificates of Deposit Account Registry Service (CDARS) in 2008. As a result of this offering and the temporary increase in insurance coverage by the FDIC to $250,000, the Corporation reported an additional $55.6 million of customer deposits as certificates of deposit greater than $100,000 at December 31, 2008.

The geographic expansion of the Corporation into desirable markets (such as Morristown and Boonton in Morris County, New Jersey) over the past several years has contributed to the growth in market share, as well as increased loan demand and change in deposit mix.

Total stockholders' equity decreased 4.2 percent from 2007 to $81.7 million, and represented 7.99 percent of total assets at year-end. Book value per common share (total stockholders' equity divided by the number of shares outstanding) decreased to $6.29 as compared with $6.48 a year ago, primarily as a result of a change in other comprehensive income coupled with the repurchase of shares by the Corporation during 2006, 2007 and 2008 under its buyback program. Tangible book value (which excludes goodwill and other intangibles from stockholders' equity) decreased to $4.97 from $5.17 a year ago; see Item 6 of this Annual Report on Form 10-K for a reconciliation of tangible book value (which is a non-GAAP financial measure) to book value. Return on average stockholders' equity for the year ended December 31, 2008 was 7.03 percent compared to 4.09 percent for 2007. This return was attributable to higher earnings in 2008 compared with 2007 coupled with lower average equity due primarily to the repurchase of shares. The Tier I Leverage capital ratio decreased to 7.71 percent of total assets at December 31, 2008, as compared with 8.13 percent at December 31, 2007.

A key element of the Corporation's performance is its strong capital base, which includes $5.2 million in subordinated debentures at December 31, 2008 and December 31, 2007. This issuance of $5.0 million in floating rate MMCapS(SM) Securities occurred on December 19, 2003. The Corporation used the net proceeds of this issuance for working capital and other general corporate purposes, including capital contributions to the Corporation's banking subsidiary to support its growth strategies. These securities presently are included as a component of Tier I capital for regulatory capital purposes. In accordance with FASB Interpretation No. 46, these securities are classified as subordinated debentures on the Consolidated Statements of Condition.

The Corporation's risk-based capital ratios at December 31, 2008 were 10.20 percent for Tier I capital and 11.02 percent for total risk-based capital. These ratios exceed the regulatory minimum of 4 percent for Tier I risk-based capital and 8 percent for total risk-based capital under regulatory guidelines. Total Tier I capital decreased to approximately $78.2 million at December 31, 2008 from $79.1 million at December 31, 2007. The decrease in Tier I capital primarily reflects stock repurchases described below.

The Corporation announced an increase in its common stock buyback program on September 28, 2007 and June 26, 2008, under which the Parent Corporation was authorized to purchase up to 2,039,731 shares of Center Bancorp's outstanding common stock. As of December 31, 2008, the Corporation has repurchased 1,386,863 shares under the program at an average cost of $11.44 per share. Repurchases are now restricted pursuant to the Parent Corporation's participation in TARP. See Item 5 of this Annual report.

The following sections discuss the Corporation's Results of Operations, Asset and Liability Management, Liquidity and Capital Resources.

Results of Operations

Net income for the year ended December 31, 2008 was $5,842,000 as compared to $3,856,000 earned in 2007 and $3,898,000 earned in 2006, an increase of 51.5 percent from 2007 to 2008. Basic and fully diluted earnings per share increased to $0.45 per share in 2008 from $0.28 per share in 2007 and 2006. All common share and per share information for all periods presented have been retroactively restated for common stock splits and common stock dividends distributed to common stockholders during the periods presented.

For the year ended December 31, 2008, the Corporation's return on average stockholders' equity ("ROE") was 7.03 percent and its return on average assets ("ROA") was 0.58 percent. The Corporation's return on average tangible stockholders' equity ("ROATE") was 8.86 percent for 2008. The comparable ratios for the year ended December 31, 2007, were ROE of 4.09 percent, ROA of 0.38 percent, and ROATE of 5.00 percent. See the discussion and reconciliation of ROATE, which is a non-GAAP financial measure, under Item 6 of this Annual Report on Form 10-K.

Earnings for 2008 were impacted by an improvement in net interest income due primarily to a lower cost of funds and a significant decrease in non-interest expense, offset in part by a decline in non-interest income, an increase in the provision for loan losses and an increase in income tax expense.

Net Interest Income

The following table presents the components of net interest income (on a
tax-equivalent basis) for the past three years.

                                                  2008                                         2007                                        2006
                                                Increase                                     Increase                                   Increase
                                               (Decrease)                                   (Decrease)                                 (Decrease)
                                                  From         Percent                         From         Percent                       From          Percent
                                  Amount       Prior Year       Change         Amount       Prior Year       Change       Amount       Prior Year        Change
                                                                                      (Dollars in Thousands)
Interest income:
Investments                      $ 14,405     $     (4,850 )     (25.19 )     $ 19,255     $     (3,215 )     (14.31 )   $ 22,470     $     (4,823 )       (17.67 )
Loans, including fees              36,110            2,583         7.70         33,527            1,528         4.78       31,999            6,670          26.33
Federal funds sold and
securities purchased under
agreements to resell                  113             (491 )     (81.29 )          604               57        10.42          547              518       1,786.21
 Restricted investment in bank
stocks                                594               45         8.20            549               42         8.28          507              110          27.71
Total interest income              51,222           (2,713 )      (5.03 )       53,935           (1,588 )      (2.86 )     55,523            2,475           4.67
Interest expense:
Deposits                           13,287           (7,548 )     (36.23 )       20,835            2,830        15.72       18,005            6,406          55.23
Borrowings                         10,808            1,013        10.34          9,795           (1,174 )     (10.70 )     10,969             (728 )        (6.22 )
Total interest expense             24,095           (6,535 )     (21.34 )       30,630            1,656         5.72       28,974            5,678          24.37
Net interest income on a fully
tax-equivalent basis               27,127            3,822        16.40         23,305           (3,244 )     (12.22 )     26,549           (3,203 )       (10.77 )
Tax-equivalent adjustment          (1,328 )            478       (26.47 )       (1,806 )            392       (17.83 )     (2,198 )            347         (13.63 )
Net interest income              $ 25,799     $      4,300        20.00       $ 21,499     $     (2,852 )     (11.71 )   $ 24,351     $     (2,856 )       (10.50 )

Note: The tax-equivalent adjustment was computed based on an assumed statutory Federal income tax rate of 34 percent. Adjustments were made for interest earned on tax-advantaged instruments.

Historically, the most significant component of the Corporation's earnings has been net interest income, which is the difference between the interest earned on the portfolio of earning-assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. There were several factors that affected net interest income during 2008, including the volume, pricing, mix and maturity of interest-earning assets and interest-bearing liabilities and interest rate fluctuations.

Net interest income is directly affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, which support those assets, as well as changes in the rates earned and paid. Net interest income is presented in this financial review on a tax equivalent basis by adjusting tax-exempt income (primarily interest earned on various obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues, and then in accordance with the Corporation's consolidated financial statements. Accordingly, the net interest income data presented in this financial review differ from the Corporation's net interest income components of the Consolidated Financial Statements presented elsewhere in this report.

Net interest income, on a fully tax-equivalent basis, for the year ended December 31, 2008 increased $3.8 million or 16.4 percent, from $23.3 million for 2007. The Corporation's net interest margin increased 44 basis points to 2.96 percent from 2.52 percent. From 2006 to 2007, net interest income on a tax equivalent basis decreased by $3.2 million, and the net interest margin decreased by 23 basis points.

The change in net interest income from 2007 to 2008 was primarily attributable to the reduction in short- term interest rates that occurred in 2008 coupled with a gradual steepening of the interest rate yield curve. Steps were taken during 2008 to improve the Corporation's net interest margin by continuing to lower rates in concert with the decline in market benchmark rates, allowing a runoff of single service high rate deposits and more volatile municipal funding, thereby lowering the overall cost of funds without impairing the Corporation's liquidity cash position. During the twelve months ended December 31, 2008, a 24 basis point decrease in the average yield on interest-earning assets was more . . .